Are Privatisations a No-Brainer?

I wrote a blog piece recently about Royal Mail Group plc. It got me to thinking about how privatisations had fared in the past. For my own part, it was a government privatisation that first got me into trading and investing. Several members of my family, like many families, applied for privatisations, and of course got scaled down: over-subscription being de rigeur. Then like most people, we had no clue how to sell them!

I resolved to find out and phoned a broker, Redmayne Bentley, who I still use in preference to an online broker incidentally, and all they needed to know was the number people these shares belonged to, whether or not I had all the share certificates to hand, and my name and address. Got the folks to do the paperwork and that was it. I received a cheque and distributed it myself. A much simpler, and preferable system, in my view. CYK is a load of pointless red tape that just makes it hard for honest individuals to go about their business, while criminals regard getting round it as a normal and fairly cheap part of doing business.

In those days a majority of people were pretty green about all this stocks and shares business, and I remember one of the campaigns, for BP I think it was. “Be part of it”, that was the slogan. But then, before the closing date for applications, the market price went below the offer price. Clearly you could just buy the shares on the open market for less than the ones on offer from the government. There was some guy by a pillar box about to put an application in the post. A TV news journalist approached him and asked if he was posting a share application for the BP offer. “Yes”, replied the man. They explained to him that he could buy them for less on the stock market. “I know,” he replied, “but I just want to be part of it.” Right, this is why not everyone should have a vote, or a job for that matter.

Since Thatch started selling the family silver to inject money into the economy, creating the illusion of a boom for many years to come, there have been some privatisations I’d approve of, and some I wouldn’t. I didn’t support selling off, lock stock and barrel, any service which shouldn’t be dictated to by economic conditions (i.e. the rail network infrastructure). On the other hand I was very pleased to see BT meet competition, although it took long enough before it was even that viable as competition goes. BT ripped us off so badly when they had a monopoly. I will never deal with them, in the same way one might not choose to go on a date with someone who had previously abused you.

A problem with privatisations is the culture of having been a government corporation, and all the baggage and tribalism that goes with that. I used to work at British Airways and there was a big shadow there of the ‘old days’. There was a militant attitude that, given their readiness to strike in spite of being the best paid staff in the airline business, tells you all you need to know about how your privatised company stock could go off the rails when push comes to shove. Employees in most government run operations live in some kind of dream world where they really don’t work as hard as those in the private sector, not by a long chalk. They are usually blissfully unaware of it though. Demonstrate this to yourself by mentioning it to anyone who works for the public sector, or a privatised industry. See how defensive they get, and how they ‘doth protest too much’. A fun way to ruin someone’s dinner party that you don’t much care for. So they are likely to be quite a bit less efficient than their private sector competitors, which may explain the delayed gratification with many of these stocks.

It’s accepted that Hayek’s economic theories encouraged Thatcher to pursue a policy of privatisation, and a generally deregulatory approach. He was for a much more hands off approach than the reality of what happened. But in true English style she just couldn’t do what he wrote, as he has since complained. No, the English way is to half-do something and hope that the results get less flak from critics. This is how we have the situation where it’s apparently so dangerous to smoke near your work colleagues that they may expire on sight. So that’s illegal. But it’s evidently ok to smoke at home with your baby and kids in the same room, and perfectly legal. Because if a thing’s worth doing, you can rely on us to half do it.

Royal Mail Group plc is now around 18 months in, and has really done nothing much, although it may be poised to. A quick initial move up as successful applicants stagged the issue, while those who wanted in filled those orders. Then a falling off, and now recovered to just above the starting price when trading opened for the first time. Is it justifiable to expect real gains now? Well let’s look at some of the major privatisations and see what happened.

What seems fairly typical, looking at the charts, is an initial rise (Rolls-Royce being the exception there). It’s many years before these stocks see what you might call ‘super-profits’ though. Is that really good for your pension? Look at BAE. Yes it has a big rise in the 90s, but if you were retiring in 2002 you wouldn’t have been best pleased. If we take these privatisations as a guide then it would seem you need a window of about 15-20 years to ensure you get a really good chance to cash out at a decent top. In the order of six-fold growth from the opening levels is achievable, but then it’s highly prudent to cash out into something more stable. They are ‘buy and hold then sell’ stocks.

When people ask me about what to put in their pension these days I say “if you don’t have defence stocks you don’t have a pension”. Wars seem to be right up there with death and taxes in terms of certainties, and we all love a certainty! There are some brilliantly diversified defence stocks to choose from. I’ll look at them another time and explain why there is absolutely no ethical dilemma in owning them for any reasonable person.

If you want the sort of growth you’ll need from Royal Mail to make it worth putting in your SIPP, then it seems clear you do need a window of more than 10 years to be confident of pulling down the best gains. Timing your exit may not be so easy. I’m a big fan of ‘when in doubt sell half’. It buys you time, and you still don’t miss out on further gains (if there are any). Plus you’ll be very happy if there’s a trade-off and you have already sold half. You can always reinvest.

A special thanks: it’s hard to get stock data this far back. The LSE offer back only to 1999, ShareScope to 1994, and Yahoo Finance back to 1988. So a big thanks to Gary Stafford at http://www.gann.co.uk/zenithanalytics for providing the charts used in this article. The only source I know of for UK stock data (with data integrity) going back to the early 80s and even beyond. And as an amusing aside, Gary’s company is based in Manchester. Epic fail for London here!